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    Romee's Avatar
    Romee Posts: 5, Reputation: 1
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    #1

    Nov 17, 2009, 06:39 PM
    Portfolio Required Return
    Stock Investment Beta
    A $400,000 1.50
    B 600,000 (0.50)
    C 1,000,000 1.25
    D 2,000,000 .75

    Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks. If the market's required rate of return is 14% and the risk-free rate is 6%, what is the fund's required rate of return.

    I'm not asking anyone to solve for me, just help me - please.
    Would my formula then be the CAPM?
    .06+1.50(.14-.05) = .18
    .06+-.50 (.14-.05) = .02
    .06+1.25 (.14-.05) = .16
    .06+.75 (.14-.05) = .12

    Do I sum up the totals? Answer would be .48?
    Or do I need to work in the weighted totals, but not sure how to do that with this formula.
    I really appreciate any help on this.
    Thanks!
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Nov 18, 2009, 08:00 AM
    The portfolio's beta is just the weighted average of the betas of the individual component securities. The weights come from the relationship of the security's value to the portfolio's total value (e.g. A's 'weight' is 0.1, as A represents 10% of the portfolio's total value).
    Romee's Avatar
    Romee Posts: 5, Reputation: 1
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    #3

    Nov 18, 2009, 12:21 PM
    Quote Originally Posted by ArcSine View Post
    The portfolio's beta is just the weighted average of the betas of the individual component securities. The weights come from the relationship of the security's value to the portfolio's total value (e.g., A's 'weight' is 0.1, as A represents 10% of the portfolio's total value).
    Thank you for your help, I really appreciate it. :)
    So the question is asking for Portfolio required return is this the same as the beta?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #4

    Nov 18, 2009, 01:01 PM
    No, you'll find the portfolio's required return just like you did for the individual components above... it'll be the risk-free rate plus a risk spread, and that spread will be 'market spread' multiplied by the portfolio's beta.
    Romee's Avatar
    Romee Posts: 5, Reputation: 1
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    #5

    Nov 18, 2009, 02:45 PM
    Quote Originally Posted by ArcSine View Post
    No, you'll find the portfolio's required return just like you did for the individual components above...it'll be the risk-free rate plus a risk spread, and that spread will be 'market spread' multiplied by the portfolio's beta.
    Thank you! :D
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #6

    Nov 18, 2009, 03:54 PM
    I'm glad it helped, Romee.
    Lily33's Avatar
    Lily33 Posts: 8, Reputation: 1
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    #7

    Jan 21, 2011, 10:43 AM
    I'm student.. I have similar problem with romme...

    So can please senoir help me to solve the problem?
    Thanks if u willing to help..

    Question:

    A money manager holds the following portfolio
    Stock Amount Invested Beta (β)
    1 300K 0.6
    2 300K 1.0
    3 500K 1.4
    4 500K 1.8

    Risk-free rate is 6% at the portfolio's required rate of return is 12.5%. The manager would like to sell all of her holdings of stock 1 and use the proceeds to purchase more share of stock 4. What would be the portfolio's required rate of return following this change?
    Lily33's Avatar
    Lily33 Posts: 8, Reputation: 1
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    #8

    Jan 23, 2011, 08:13 AM
    Hey... romme.. I can't access yr attachment that u sent to me..
    So *** help me solve my question in here if u're willing... thanks
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